More Rough Going Ahead?

Dan Sullivan, editor of the Chartist, says the market has given up its advance since March and now threatens to move lower still.

Not only has it been rough going for the market this year, [but] the stock market has made very little progress since the end of 2004. From December 31, 2004 to the present, a period encompassing about 3 1/2 years, the Standard and Poor’s 500, Dow Jones Industrial Average, Russell 2000, and Nasdaq Composite index have only tacked on gains of [less than 10%]. Close to 60% of the stocks that make up the S&P 500 are under water over this period.

What we have now is a market that cannot seem to get out of its own way. Currently, the advance/decline line on the New York Stock Exchange, consisting only of common stocks, continues to lag badly. The advance/decline volume line is in even worse shape and is currently close to a three-year low.

On top of this, the high-low differential, which is a ten-day moving average of new highs versus new lows, has been deteriorating over the past several days and is once again showing a plurality of new lows.

However, the high-low differential is in much better shape than the advance/decline line. We say this because the differential registered -300 at the January lows, versus -150 at the March bottom. This represents a very significant non-confirmation.

The thrust off the March lows was most impressive, with upside volume exceeding downside volume by 19 to 1 on March 18th. This was the eleventh strongest upside thrust reading in over a quarter of a century. From its intraday lows on March 17th through its intraday highs on May 19th, the benchmark S&P 500 posted a gain of 18%.

This was an approximate two-thirds retracement of the ground lost from the bull-market intraday highs set on October 9th of last year through March 17th. In the process, the S&P 500 almost moved above its 200-day line on May 19th, closing fractionally below. From that point it abruptly headed south and took out a bullish trend line traced out from the March lows. The intraday pullback from May 19th through June 12th encompassed a loss of -14%. From that point, the market rallied, albeit on low volume.

The bottom line is that the market continues to lack conviction, and our models are still in negative territory. This is the time for patience. In the event that the March lows did indeed mark the end of the bear market, there will be ample time to take some very worthwhile positions with a great deal of upside potential. But in the interim, it should be realized that if the March lows are taken out, the market could be in a great deal of trouble. (The Dow has fallen under its March closing lows, but the Nasdaq and the S&P have not—Editor.)